2022 - a mid year risk perspective

In 2020 and 2021, I set out my Risk Management observations in advance of the year end discussions of Principal Risks for December year end reporters. However, there is an increasing need for management and Boards to treat the half-year report as an additional opportunity to have a fundamental discussion to ensure that the risk disclosures reflect fully the Principal Risks facing the business. This also avoids the tendency to make the half year discussion a review of the previous ARA risk disclosures, without dedicating sufficient time to evaluate the risk implications arising from changes to the external context as well as the positioning of the business model.  

In the latest year end process, the rapidly evolving risk landscape forced many companies to take a step back as they finalised the risk reporting for FY 2021. The increased political uncertainty arising from Russia’s invasion of Ukraine which added further upward pressure and volatility to energy prices, also had flow through impact in areas such as agriculture in terms of availability and inflation. This is in addition to the potential post year end asset impairments that companies with businesses in Russia and Ukraine had to consider.

One of the salient lessons for Executive Management and Boards is that low probability and high impact risk events (HILP risks) occur more frequently than we have conditioned ourselves to believe. In addition, the recent pandemic and increased geopolitical uncertainty illustrate the fallacy of looking at risks in isolation rather than in aggregate. Despite this, there is only limited evidence that companies have enhanced significantly their LTVS modelling and indeed early adoption of the resilience recommendations in the UK BEIS consultation on possible changes to the UK Governance Code.   

It is therefore becoming even more important that Boards allocate sufficient time to conduct a comprehensive risk discussion both at half-year and year end, to ensure that the Principal Risks reflect fully the evolving risk profile. Not only is this a business imperative – it is also an integral part of the ‘ongoing monitoring and control’ that Boards and Audit&Risk Committees need to demonstrate.

In the current environment, the use of a disruption approach to risk identification might challenge existing thinking, provide further insights and allow the Board to ensure that future disruptive risks are taken into account in planning and decision-making. In the event that new risks or new combinations of risks are identified, the impact of these on the resilience of an organisation can be assessed and if required, the necessary improvements can be made. 

As we approach the half-year process, there are therefore a number of additional risks that merit consideration in the Board risk discussion. These include, in addition to the risks mentioned above, for example;

• Inflation and price pass-through
• Macro-economic and post-pandemic growth outlook
• Sources of further disruption
• Supply-chain dependency and single points of failure
• Deglobalisation and impact on sourcing, supply-chain, availability and costs
• Technology disruption

The lessons from the pandemic and recent geopolitical events illustrate clearly that businesses need to incorporate a broader view of the risks that could impact adversely on the performance and prospects of their organisation. They also show that understanding and managing interrelated risks are key to business success and longevity. There is therefore a strong case to suggest that leveraging both the existing LTVS approaches as well as the proposed resilience recommendations, could enhance the ability of organisations to anticipate and manage a more complex, volatile and interrelated risk landscape to protect and enhance value.